TORONTO, Ont. - When the assembly lines aren't churning and the cash registers aren't ringing quite like they used to, it's a safe bet that truck wheels won't be turning like they used to either. Manu...
TORONTO, Ont. – When the assembly lines aren’t churning and the cash registers aren’t ringing quite like they used to, it’s a safe bet that truck wheels won’t be turning like they used to either. Manufacturing and retail are two of trucking’s most important customers and while retail expects modest growth for 2007, manufacturing, particularly in Central Canada, is still in a tailspin.
“We are in for another challenging year in manufacturing,” was the dour outlook provided by Jason Myers, senior vice-president and chief economist with the Canadian Manufacturers and Exporters, during a panel session on the economic forces impacting trucking’s largest customers, held at the OTA’s annual conference in November.
Although manufacturing in Western Canada is booming, Ontario accounts for about half the country’s manufacturing output and it is smarting from the combined pressure of high energy costs and a high Canadian dollar which reduces the attractiveness of our manufactured products on the US market. Over the past decade Ontario’s manufacturing sector has outperformed that of every other western country in terms of growth, according to Myers but the pace has cooled down since 2004. Manufacturing shipments for the first six months of this year were up just 0.5% over the previous year and are expected to drop 8% in 2007 for Ontario.
Myers provided a comparison of costs and pricing between 2000 and 2006 to show why manufacturers have run into troubles. Energy costs since 2000 are up 126%; raw materials costs are up 65%; transportation costs are up 36%; and hourly labour rates are up 20%. In contrast, prices for food products have gone up 6% since 2000, while pricing for first stage intermediate and second stage intermediate goods has gone up 14% and 4%, respectively.
“If you are in a situation where your prices are flat or up a little bit and your costs are up significantly, you’ve got to do something,” Myers said. “That’s why they are reassessing product lines and cutting costs and jobs.”
But Myers added he is concerned the cuts may be leaving Canadian manufacturers less competitive and without the financial resources to invest in the technology necessary to propel future growth.
“This is taking the wind out of their sails just when they needed to be investing,” Myers worried. “…What affects manufacturing affects everyone, particularly those of you in trucking because you are on the front lines.”
Mark Nantais, president of the Canadian Vehicle Manufacturers Association, expressed concern the current shift in sourcing from plants in the US, Mexico and overseas will be compounded by inefficient border crossings. About 70% of automotive shipments, which amount to about $130 billion annually, go through two border crossings – the Ambassador Bridge and the Blue Water Bridge.
“During production vehicle parts and components and subassemblies can cross the border up to seven times a day due to the integrated nature of the automotive industry. If there isn’t a reliable, predictable border, it gets factored into investment decisions,” Nantais said. “The border has become layered with overlapping and inefficient regulations. It continues to get stickier. We are going in the wrong direction. It’s very clear that if we don’t do something, the next event will have a significant impact on how we move products across the border.”
He added that government programs such as CSA, FAST and C-TPAT designed to facilitate more efficient crossings are not measuring up. A lack of measurable benefits is lacking and that has an impact on participation, he charged.
“We need dedicated lanes, contingency plans, fewer inspections and penalties and improved infrastructure,” he said.
Nantais pointed out that the supporting highway infrastructure has a major impact on the ability to provide efficient border crossings. “How well will Hwy. 401 function with five million people living in the Greater Toronto Area by 2030?” Nantais wondered, referring to a recently released population projection for Canada’s largest city.
On a more positive note, motor carriers best able to tap into the growth in Western Canada have much to look forward to. Over the next 10 years there may be as much opportunity serving the western boom as spending 80 years chasing the current volume of business from our trade with China, according to Myers.
And while the Big Three automakers are having their troubles, the offshore manufacturers who have set up production in Canada are booming.
Japanese automotive manufacturers, for example, have increased their market share from 24% to 35% since 1999 while the Big Three’s market share has dropped from 71% to 53%, according to David Adams, president of the Association of International Automobile Manufacturers of Canada.
“There is bad news out there but there is good news too. The new domestic suppliers are growing and adding to demand,” Adams said. But even so, exports from the “new domestic suppliers” are expected to drop by 5% next year, as the US market softens following the bursting of its housing bubble.
While most analysts so far believe this will make for a market correction to our largest trading partner that should be over by the middle of 2007, Myers is concerned there may be fundamental problems with the US economy that could get in the way.
“Growth in the US since 1997 has been through foreign investment. What happens if those foreign bankers find a better place to put their money? The US dollar is falling because of the high debt load in the US and setting us up for a major correction of the economy,” he said. “Consumers will first have to repair their own personal accounts before they can start spending again.”
Diane Brisebois, president and CEO of the Retail Council of Canada was more optimistic about the retail sector’s fortunes next year. She expected the retail sector, another important purchaser of trucking services, to continue growing next year, albeit at a slower pace. Sales should grow about 6% this year and close to 5% next year, according to Brisebois.
The major issues with retail customers will revolve around growth – they’re not opening stores because they can’t get staff – and downward pressure on pricing.
“There is a lot of pressure on pricing because the retail customer is extremely value-conscious. They are much more concerned about how little they pay for some items than where they buy them. The implication is that you will continue to face price pressures,” Brisebois explained, adding that industry consolidation is creating bigger retail customers with more clout during rate bargaining.